10/10/2007 @ 3:19PM

Eight Signs You're Not Ready For Outsourcing

Outsourcing some or all of your company’s IT functions can jump-start your business, push it to the next level or just get your systems under control. But for outsourcing to work, you’ll have to manage it carefully. Read the eight signs below before taking the plunge.

You haven’t done due diligence on potential vendors.

That’s what got Erin Hurry, founder of Girls with Goals, into trouble. She worked with a series of outsourcers to develop her company’s Web site. “I took people’s word. The first company we worked with said they had worked for Ford Motor and Bacardi, but I never called those companies to ask how it worked out,” she says. And it turned out that that company had been sued by previous clients.

Hurry cautions that you should ask about whether the vendor you contract with will be outsourcing the work to another party–and if so, you want the details on that third party. That includes background checks on the employees who will actually be doing the work for you, and what the company’s turnover rate is, especially in a market like India where job-jumping is the norm.

“They have a huge [application developer] turnover rate in India, so one person starts the code, then goes missing, and then someone else starts again and the whole project is mess,” Hurry says. “Then they want to come back at you to get more money. You have to be very careful, and ask questions. Do your research and have a contingency plan.”

MyWeather president Kevin Baird has seen a bad outsourcing choice affect one of the partner companies he deals with, because it chose an outsourcing provider without having a good understanding of how that provider was investing in its own resources. “Their business, their ability to grow and deploy new elements inside their business, has been significantly hampered by a partner who simply doesn’t have the bandwidth to provide them with the people and resources they need, regardless of how much money they would spend,” he says. “That has cost them time to market. Now they’re going away from that partner, and it will cost additional incremental funds, because they’ve got to move everything.”

Fast-growing companies don’t necessarily know what their future needs will be, so they need to feel confident that the service provider will always be a step ahead.

You don’t have any plans for managing the relationship on an ongoing basis.

Many IT service providers–especially the larger ones whose business models justify a year’s worth of a team’s work courting a $100 million deal–have yet to figure out the best sales and selling models to make much smaller deals profitable. With a very high cost of sales to the small and midsize business market, one solution some have is to keep account management overhead low.

For a small company, that means that your account management team, issue escalation personnel and the guy managing your project likely will be the same person. “It will be difficult to manage the outsourcing engagement and control the outsourcing engagement,” says Ross Tisnovsky, VP of information technology outsourcing research at Everest Research Institute. But necessary. “Relationship management becomes your problem, meaning you have to manage them.”

So, whether it’s a team, a person or half a person, someone has to take responsibility for the engagement on your end–which, by the way, was a lesson learned by big companies when they first got into outsourcing a decade or more ago. “Learn from the mistakes of the [big guys], when they first started doing these deals, and after they did the transaction everyone just went back to their day jobs,” says Frank Casale, CEO of the Outsourcing Institute. And without oversight and governance, the result often was failure.

At MyWeather, that person charged with day-to-day relationship management is its VP of technology development. “You have to have someone who can manage that part of your business, and depending on how big you are, that person also might be doing other things,” says Baird.

You don’t have your own house in order.

IT is broken at your company and you’re hoping an outsourcer will come on board and make everything all better. Wrong. Now you’ll just get to pay someone else to run your flawed or ill-defined processes and inefficient systems “You want to avoid what we call the ‘Your mess for less scenario,’ where your IT dept is in a total sense of chaos and you just hand it off and expect them to fix it,” says Casale. “Those scenarios don’t play out well.”

Same thing with business processes. “Very few companies actually understand what they do. They can’t define it or lock it down,” says Vic Berger, manager of business development at
CDW
, seller of computing products. To understand processes before you outsource them, give individuals a legal pad and have them write down everything they do each day for a week. “It starts giving you a better picture of where work flow is going,” says Berger, and what applications you may not even have accounted for that are pretty well used. “Then you can better see what has a potential for outsourcing.”

You can’t compromise on customization.

For very small infrastructure-related projects, suppliers generally cannot provide any kind of customization, Tisnovsky says. Forget about running e-mail your way–you’ll have to follow the supplier’s route to running
Microsoft
Exchange. “They provide highly standardized managed services–it’s the only way they can do it for scale,” he says. “You have to be willing to change your processes and the way your end users work. You will use absolutely standard e-mail and scheduling.”

You can’t wait–literally–to get to market.

Start-ups that need to get their applications developed so they can get to market fast may benefit from an outsourcing or offshoring relationship, but they’ll have to choose carefully. “Working with a company that is CMM 5 [a process-improvement methodology], and has wonderful procedures, will become virtually impossible, because CMM 5 requires significant overhead, documentation overhead, spec changes–everything is a process under CMM. If your concern is time to market, you don’t want that,” says Tisnovsky.

Instead, if you’re going to outsource or offshore, you need to partner with a company that will give you direct collaboration with the developers over process maturity. That kind of relationship is more likely to be available from a much smaller Tier 2 offshore provider that’s hungrier for the business, he says.

Your organizational culture is more about confrontation than collaboration.

Even the smoothest outsourcing relationship is going to have a problem now and then. Some companies always will take the view that it’s the vendor’s fault, and either they fix things or they’re gone, rather than work together to figure out how both sides can address the issue.

Companies that take the former approach may be better off not outsourcing at all, because there’s no cheap and easy end to the relationship. “Outsourcing costs time and money and commitment to get involved in, so it’s expensive and painful to get out of,” Casale says.

You won’t be ready to move forward aggressively on your plans.

You can’t just plan for outsourcing–you’ve got to be ready to move forward fast, with an aggressive time line that lets your company realize its stated intentions and keeps them from moving to the back-burner. “The hang-time creates morale issues,” says Casale. “Cost and risk goes up and your ‘A’ players are the first to leave if there’s uncertainty.”

Your expectations about cost-savings are unrealistic.

Of course, outsourcing is about saving money, but not necessarily right away. For one thing, suppliers may not be able to price their services as aggressively for smaller contracts as they do for bigger deals. For another, the process of delivering IT and recovering its costs is somewhat informal in some organizations, including large companies, Forrester Research principal analyst Bill Martorelli says. When organizations don’t know what their true IT cost base is to start with, they can be in for a shock when a price tag is attached to those services.

It’s not wrong to make cost savings a prime consideration–90% of the outsourcing deals still being made are about just that, says Casale. “But,” he says, “if your focus and objective of outsourcing are limited to short-term tactical benefits like expense reductions, so, too, will your benefits be limited to short-term and tactical. If you’re willing to have a grand revision and think of the upside, both long-term and strategic, then you have a wonderful opportunity.”

Translation: Conversations with your outsourcer should be about issues such as increasing response time for clients, which boosts your business, rather than about how to save 20% on overhead costs.

For Baird, it’s all about understanding the costs up and down the line, rather than taking a narrow view. “You never will convince any business person worth his salt that cost savings shouldn’t be up there,” he says. “But, competitively, the ability to win is determined by your ability to stay ahead. I think it’s impossible to stay ahead unless you can afford to have multiple experts and expertise in all the areas that a partner has experts in.”

If you don’t see your organization as grappling with these issues–or if you believe you can put in place the mindset, plans and policies to change perceptions and expectations, and remove roadblocks–then welcome to the wonderful world of outsourcing.

Jennifer Zainohas served in senior and executive editor roles at publications including InformationWeek, Network Computing, HomePC and PC Magazine.